Standard Chartered Bank has held talks with one of Iraq's biggest private banks over its possible acquisition.
Negotiations with Warka Bank are still in the early stages, according to a bank official. "It's not final until it's absolutely final," he said. The lender has a network of 120 branches in Iraq.
It comes as the country's central bank calls on banks to increase the size of their capital to US$214 million (Dh786m) and submit financial statements before the end of 2013.
The regulator wants to reduce the number of local lenders and attract foreign investment into the sector.
A merger would "put the bank in a very strong position and give the ability to finance major projects", said Mohammad Al Samerai, the executive director at Warka Bank in Baghdad.
Standard Chartered Bank declined to comment yesterday.
Warka Bank has been suspended from trading on the Iraq Stock Exchange for more than a year as it faced difficulty in its business operations and struggled to increase its capital after the central bank introduced minimum capital requirements of 50 billion dinars (Dh155.6m) in 2009, raised to 100bn dinars by last year.
That would have increased to 150bn dinars next year and 250bn dinars 12 months later.
"Warka Bank had to find a suitor, there was no way they could make up the capital," said Hal Miran, an analyst at Rabee Securities, a broker based in Erbil.
"They have not generated new business, not made any loans, they owe a lot of companies large amounts of money," said Mr Miran. "Standard Chartered Bank will benefit by getting a licence to operate in Iraq, which is now becoming increasingly difficult for foreign banks to obtain, in addition to a network of branches and infrastructure already in place."
There are 43 banks in Iraq, with the sector dominated by seven state-owned institutions, while the private sector accounts for just 10 to 15 per cent of deposits. In a country of 39 million people, there are only 700 to 800 bank branches.
Private banks were permitted in the late 1990s under Saddam Hussein, in a sector that had been nationalised since the 1960s. But many are small, family-run entities with limited operations.
Some foreign banks have already acquired stakes in Iraqi institutions. HSBC owns 70 per cent of Dar Es Salaam Bank, and National Bank of Kuwait has a 75 per cent stake in Credit Bank of Iraq.
"Over the coming period, we will see more M&A [mergers and acquisitions] activity in Iraq's banking industry as international banks come into the arena and either buy out smaller banks or come on their own," Mr Miran said.